RBA stays on the sidelines
As broadly expected, the Reserve Bank of Australia held the Cash Rate Target at 1.5%. Amid the release of the statement, the volatility increase temporarily as investors try to read between the lines; however, the Aussie quickly stabilised and even eased slightly as the greenback rose across the board. AUD/USD slid to 0.7520 during the European morning as the dollar kept pushing higher. Indeed, after increasing 0.35% on Monday, the dollar index rose 0.15%.
The RBA maintained its well-known caution, especially regarding developments in the FX market, saying “on a trade-weighted basis [the Australian dollar] remains within the range that it has been in over the past two years” and adding, “An appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast”. Nevertheless, Governor Lowe was quite optimistic regarding the growth outlook and remained confident that China’s growth will stay solid. The Bank expects that growth will average “a bit above 3% in 2018 and 2019“ as non-mining business investment continues to increase. Nevertheless, the institution expressed reserves about the outlook for household consumption, naming high debt level and slowing growth of income as source of uncertainties.
Overall, the RBA seems to be happy with the current situation and sees no reason to change the monetary environment at the moment. Therefore, AUD/USD will most likely be driven by the US dollar in the near term. Given the fact that investors have turned more optimistic about the buck lately, we expect further downside in AUD/USD.
German core inflation slowdown amid manufacturing activity decline
German inflation data supports last Thursday Draghi’s ECB meeting view of a slowdown in European economy. April inflation remained stable, given 1.60% (consensus: 1.50%) while core inflation declined, at 1.40% (prior: 1.50%) due to a decline in services and manufacturing activities. The situation remains however comfortable for the German economy and the EU as a whole. Supported by an unemployment rate at historical lows (March: 5.30%), consumer confidence at its highest level and wage growth above 4% (Eurozone: 2% range), German underlying inflation is expected to accelerate in the near term.
As Italian and Portuguese inflation data also disappointed in April, we expect Eurozone March inflation data published on May 3, 2018 to decline below the 1% threshold, most probably at 0.90%. We remain however confident that this inflation downturn should not be worrisome for the EU economy. Expansion in the EU shall continue.
Due to disappointing inflation data among EU members, we expect the single currency to decline further against most peers. EUR/USD strong decline continues, approaching hourly support at 1.2028 (11/01/2018 low) and heading along the 1.2035 range.
